Due to FDI there is an increase in productivity, which occurs due to technology transfer or due to improved managerial, technical skills. Also, there is an unemployment reduction in the host country.
Also there is a possibility of earning foreign exchange with sale/export of FDI produced goods abroad (generally, foreign investors may help introduce and integrate the economy of the host country in to the global market place). All this leads to increase in a competitive market leading to increase in overall GDP of the nation.
According to the Balance of Payments Manual in cases of FDI, the investor’s purpose is to gain an effective voice in the management of the enterprise. The foreign entity or group of associated entities that makes the investment is termed the “direct investor”. The unincorporated or incorporated enterprise – a branch or subsidiary, respectively, in which direct investment is made – is referred to as a “direct investment enterprise”.
Once a direct investment enterprise has been identified, it is necessary to define which capital flows between the enterprise and entities in other economies should be classified as FDI.
The forms of investment by the direct investor which are classified as FDI are equity capital, the reinvestment of earnings and the provision of long- and short-term Intra-company loans (between parent and affiliate enterprises).
The most important characteristic of FDI, which distinguishes it from portfolio investment, is that it is undertaken with the intention of exercising control over an enterprise.
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